Posted: April 29th, 2015

Teco401 Economics Principles

Teco401 Economics Principles

Question 1 (3 marks)
Using Okun’s Law, fill in the four pieces of missing data in the table below.
Year
Real GDP
Potential GDP
Natural Unemployment rate (%)
Actual Unemployment rate (%)
2001
7840
8000
(a)
6
2002
8100
(b)
5
5
2003
(c)
8200
4.5
4
2004
8415
8250
5
(d)
Question 2 (5 marks)
An economy is described by the following equation Cd=2600+0.8(Y-T)-10000r, Ip=2000-10000r, G=1800, T=3000,
The real interest rate is 0.10. Find the numerical equation relating planned aggregate expenditure to output. Solve for short-run equilibrium output. Show your result graphically using Keynesian cross diagram.
Question 3 (6 marks)
Use the following economic data to calculate private saving, public saving and national saving.
a) Household saving =20, business saving=40, government purchases of goods service=10, government transfers and interest payments=10, Tax collection=15,
GDP=220.
b) GDP=600, Tax collection=120, Government transfers and interest payments=40,
Consumption expenditures=450, Government budgets surplus=10
Question 4 (4 marks)
a) Gold is $350 per ounce in the U.S and 2800 per ounce in Mexico. What nominal exchange rate between U.S. dollars and Mexican pesos is implied by the Purchasing Power Parity (PPP) theory?
b) The demand for and supply of pesos in the foreign exchange market are
Demand =30,000-8000e, Supply=25000+12000e
where e is nominal exchange rate which is expressed as US dollars per pesos.
i) What is the market equilibrium value of the exchange rate?
ii) If the pesos is fixed at 0.30 U.S dollar. Is the pesos overvalued, undervalued, or neither? What happens to the country’s international reserves over time?